A U.S. Cap-and-Trade Experiment To End

A Valero refinery in Norco, Louisiana, is just one of the thousands of facilities in the United States with carbon emissions that a nationwide cap-and-trade program would have sought to rein in. Valero fought unsuccessfully for a ballot measure that would have halted California's global warming program.

Some time before the campaign ad showing a U.S. Senate candidate shooting proposed climate legislation with a rifle, the companies participating in a key experiment to test cap and trade in the United States decided that the idea was already dead.

The Chicago Climate Exchange (CCX), the eight-year-old platform where power companies, manufacturers, and others agreed to reduce their greenhouse gas emissions and traded the credits they earned for their success, will shut down that program at the end of this year. That’s when the current commitments made by the CCX market participants were set to expire, but those involved in the program agree that their efforts would have continued if there were any prospect of congressional climate change action on the horizon.

Although advocates of U.S. action on climate change could take away some good news from the results of the November 3 election—most notably, Californians rejected an effort to roll back the state’s pioneering global warming program—a Republican majority in the U.S. House of Representatives will effectively stymie any renewed effort to advance a bill like the one narrowly passed by the Democratic-controlled House in June 2009. The Senate’s Democratic leaders were unable to muster the 60 votes needed to affirm that legislation, even before the loss of at least six seats Tuesday.

Particularly problematic was the lack of support from Democrats who represent coal and industrial states. That issue won’t go away in a Senate with newcomers like West Virginia Democratic Governor Joe Manchin, who memorably vowed in his TV ads to take “dead aim at the cap-and-trade bill.”

A Carbon Market's Early Promise

Long before cap and trade became a political target, many in industry and the environmental community alike saw it as an approach for reducing greenhouse gases that would be less costly and more market-friendly than old-style top-down regulations from Washington, D.C. That was the appeal of the CCX experiment, developed by pioneering economist Richard Sandor, known as the father of financial futures.

The idea was that although participation in the CCX market would be voluntary, the companies that joined would have to sign legally binding contracts to reduce their emissions. Those who could find quick and low-cost ways to cut their carbon pollution could sell their credits to other companies that were having a hard time meeting their goals. Eventually, there were 450 members of the exchange—power companies, manufacturers, cities, and universities, including such big names as Ford, DuPont, Motorola, International Paper and Honeywell.

CCX calculates the program resulted in emissions reductions totaling nearly 700 million metric tons of carbon dioxide since 2003, equivalent to taking 140 million cars off the road for a year. Reductions in industrial emission accounted for 88 percent of those cuts, while the remaining 12 percent came from so-called offset projects, such as tree planting.

“Many of us were doing this not only to make voluntary commitments, but as a way that we could get prepared for a mandatory future,” says Bruce Braine, vice president of strategic policy analysis for Columbus, Ohio-based American Electric Power (AEP), one of the founding members of CCX. “We were learning the ropes, learning about trading and trying to become more proficient in reducing our carbon footprint over time.”

AEP, one of the largest electricity generators in the United States with two-thirds of its capacity coal-fired, reduced its carbon emissions by 70 million metric tons over the course of its eight years in CCX, mainly through emissions improvements, says Braine. The company has reduced its greenhouse gas emissions 20 percent since 2000. Braine says AEP aims to continue to work toward reducing emissions, though not through CCX.

CCX will continue to operate a registry for carbon offset programs, which presumably would be helpful to those seeking to make voluntary emission reductions. And Emilie Mazzacurati, head of North American research for Point Carbon, a Thomson Reuters company that follows the development of carbon markets, notes that there will continue to be carbon trading on the Chicago Climate Futures Exchange (CCFE)—a platform for both voluntary and small, regional mandatory climate programs like the one adopted in the northeastern United States. (IntercontinentalExchange, the Atlanta-based owner of CCX, says it will continue to operate both the Chicago Climate Futures Exchange and its much larger and more profitable European Climate Exchange.)

California's Vote for Climate Action

Mazzacurati says that Point Carbon expects the Chicago Climate Futures Exchange to be one of the platforms that will be vying for a share of trading in the regional carbon market that analysts now see developing in the Western United States and Canada, because Californians voted on Election Day to move forward with their state’s planned market-based program for reducing greenhouse gas emissions. The symbolic importance of that decision at the ballot box, Mazzacurati argues, “cannot be overstated.” She says California’s size and clout will likely encourage other jurisdictions to join in the market to reduce carbon emissions with California, including potentially the Canadian provinces of British Columbia, Ontario, and Quebec.

The California program was at risk when Proposition 23 was placed on the state ballot. It was a measure to delay implementation while the state’s economy was suffering, and was strongly supported by two refining companies with large operations in California, Valero and Tesoro. But opponents of Proposition 23 got help from wealthy philanthropists and Silicon Valley billionaires who are invested in green technology, and who outspent the bill’s backers. “Prop. 23 is the only place in the country where the words ‘global warming’ were actually, literally, on the ballot,” says Tony Massaro, senior vice president for political affairs with the League of Conservation Voters (LCV). “And that’s in the state with the third-worst unemployment rate in the country. Californians said the way to build our way out of this is with clean energy jobs.”

Massaro said it was important to note that at the Congressional level, the tide was not wholly against climate action. Seven of the so-called “Dirty Dozen” candidates LCV campaigned against, including several who denied the science of climate change, were defeated. But Massaro said the important California result will mean a renewed focus on the advances that can be made outside of Washington, D.C. “It means we’re going to keep working at all this stuff at the state level, as we’ve done for years,” says Massaro. “Our preferred plan, Plan A, didn’t pass. But we will go forward with Plan B.”

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